TITLE: UNDERSTANDING MODERN BANKING OPPORTUNITIES AND

CHALLENGES THROUGH THE IMPLEMENTATION OF BLOCKCHAIN

TECHNOLOGY.

Team: Mr. Sanju Jacob Mathew

Mr. Abin J Shaji

Mr. Romi Roy

College: Saintgits Institute of Management, Pathamuttom, Kottayam.

ABSTRACT

Since its inception, the blockchain technology has shown promising application prospects in
the banking systems all across the world through facilitating global money remittance, smart
contracts, automated banking ledgers and digital assets. Large borrowers (who have
aggregate fund-based and non-fund based exposure of ₹5 crore and above) accounted for 54.8
per cent of advances and 85.6 per cent of NPAs. Furthermore, top 100 large borrowers
contributed to 15.2 per cent of advances and 26 per cent of NPAs. This tells us that, the
banking system instability has been contributed by the large borrowers. Hence, the banking
industry requires urgent transformation and is seeking new growth avenues. As such, block
chains could revolutionize the underlying technology of the payment clearing and credit
information systems in banks, thus upgrading and transforming them. The paper discuss the
key clinches and other prospective gains of blockchain technologies and also what are the
future possible detriments due to the application of blockchain technology in our Indian
banking system.

Keywords: Block chain, credit information systems, automated banking ledgers, smart
contract, and digital assets.
INTRODUCTION

Blockchain has the power to change the nature of corporations. It is critical that every
investor understands this new technology and its implications. For the first time in history
assets can be transferred peer-to-peer without an intermediary using an internet of value.

The second era of the digital revolution is here, and it has the potential to change everything
about the way we interact around the world.

The technology behind this new revolution is called ‘blockchain’ – the underlying technology
behind crypto currencies like bitcoin and ether. Using cryptography, some clever code and
collaboration, blockchain creates a decentralised network with trust built into the system.
This represents nothing less than the second generation of the internet, and it holds vast
promise for businesses, societies and individuals around the world. In turn, this will impact
investments.

In this article, we argue that the answer may lie in the fundamental technology that
underscores emerging crypto currencies. Bitcoin, the world’s first decentralized digital
currency was launched in 2008. Bitcoin is underpinned by a peer-to-peer computer network
that is made of its users’ machines, similar to BitTorrent. In addition, a changeable Public
Key (PK) is used as user’s identity1 to provide anonymity and privacy. The main technology
behind Bitcoin is called BlockChain (BC), an immutable public record of data secured by a
network of peer-to-peer participants. BC is rapidly gaining popularity and is being used for
many other applications including smart contracts, distributed cloud storage and digital
assets. BC consists of blocks chained together as a ledger. Any node in the peer-to-peer
network can choose to be a miner, an entity that is responsible for mining blocks to BC by
solving a resource-intensive cryptographic puzzle called Proof Of Work (POW) and
appending new blocks to BC. When a new transaction occurs, it is broadcast to the entire
network. All miners who receive the transaction verify it by validating the signatures
contained within the transaction. Each miner appends the verified transaction to its own
pending block of transactions that are waiting to be mined. The robustness of the BC is
ensured by the fact that multiple miners process a single transaction.
However, robustness comes at a price as multiple miners have to expend their resources for
mining the same transaction, which in turn also increases the delay. The following salient
features of BC make it an attractive technology for addressing the aforementioned security
and privacy challenges in IoT:

• Decentralization: The lack of central control ensures scalability and robustness by using
resources of all participating nodes and eliminating many-to-one traffic flows, which in turn
decreases delay and overcomes the problem of a single point of failure.
• Anonymity: The inherent anonymity afforded is well-suited for most IoT use cases where
the identity of the users must be kept private.
• Security: BC realizes a secure network over untrusted parties which is desirable in IoT with
numerous and heterogeneous devices.
However, adopting BC in IoT is not straightforward and will require addressing the following
critical challenges:

• Mining is particularly computationally intensive, while the majority of IoT devices are
resource restricted.
• Mining of blocks is time consuming while in most IoT applications low latency is desirable.
• BC scales poorly as the number of nodes in the network increases. IoT networks are
expected to contain a large number of nodes.
• The underlying BC protocols create significant overhead traffic, which may be undesirable
for certain bandwidth-limited IoT devices.

OBJECTIVES OF THE STUDY

The main objectives of this paper is to

1. To understand the application of Block chain technology that delivers security and
privacy in the banking sector.
2. To exemplify ideas, proposed for Block chain application in the banking sector.
3. To understand the implications of Block chain in banking system.
4. To conduct a SWOT analysis of Block chain.
5. TO understand the core concepts in Block Chain.
LITERATURE REVIEW

Blockchain technology has the potentiality to optimize the global financial infrastructure,
enhancing the efficiency of current financial systems.

Goertzel et al. (2017) have noted that the contracting with the blockchain technology
application ensures the opportunity to reduce the impact of state and government structures
on economic activity simultaneously with the humanization of global economic interaction.
The authors note that the informational revolution and appearance and use of more
sophisticated data processing algorithms ensure the business processes transparency, and in
the case of blockchain application provide an opportunity for the parties of the transaction to
decide on the possibility of its effecting considering all components and stages of the product
formation. To this end the practice of the blockchain technology’s application in global
digital economy can be expanded far beyond the purchase and sale transactions, and be
applied, for example, for the organization of various projects (crowdfunding, crowdsourcing,
outsourcing, etc.).

(Jackson, 2016) From a managerial and theoretical standpoint, it is difficult to determine the
exact location of blockchain technology on the diffusion of innovation adoption curve, as
adoption of an innovation can be influenced by a number of factors including network
effects, technical complexity, technical compatibility, trialability, perceived needs of relative
advantage. In general, the diffusion of innovation, along with the adoption curve, are based
on the number of users who have successfully adopted the technology. Blockchain
technology, particularly its Bitcoin implementation, is seeing growth both financially as well
as in mainstream adoption.

(Young, 2016). Though this adoption exists globally, the adoption rates vary by country, for
example the adoption of blockchain technology has been slower in areas due to risk
mitigation and regulatory requirements.

(Harwood-Jones, 2016; Swan, 2015a, 2015b) Blockchain’s wider and deeper application
applications are potentially constrained by limitations posed by technical/scalability
challenges, business model challenges, scandals and public perception, government rules and
privacy challenges for personal records.

(Valentina Gatteschi et.al,. February 2018.future internet. MDPI ) The blockchain (literally, a
“chain of blocks”) made its first appearance in the research scenario in 2008, in the frame of
the Bitcoin initiative. The objective was to transfer online payments from one party to
another, without relying on intermediaries. In this context, the blockchain was acting as the
underlying ledger recording Bitcoin transfers and guaranteeing, by means of cryptographic
operations, the authentication and non-repudiation of payments. Even though Bitcoin is, by
far, the most famous cryptocurrency, it is not alone. In fact, since 2008, more than 1300
cryptocurrencies have been created, which are being used as exchange tokens in many
different blockchain-based applications. The core concepts behind the blockchain technology
are reported in the following.
- Transactions: each cryptocurrency transfer from one subject to another is represented as a
transaction from A to B. Cryptocurrency is neither a physical nor a software object, but the
result of incoming and outgoing transactions. For this reason, the blockchain keeps track of
all the transactions occurred from its birth.
- Blocks: transactions are grouped in blocks. Each block collects all the transactions
occurring in a given timeframe and keeps a reference to the preceding block (that is where the
concept of
“chain” comes from).

- Nodes: instead of being stored in a centralized database, the blockchain is spread over
network computers (the “nodes”), each containing a local copy of the entire blockchain.

- Majority consensus: since a central authority is missing, decisions on the network are made
according to a majority consensus. Each node modifies its local copy of the blockchain to
make it mirror the status of the majority of the network nodes.
- Mining: could either passively store a copy of the blockchain, or actively take part to the
maintenance of the blockchain, in the so-called “mining” process. During mining, nodes
check previous transactions to verify whether a subject is entitled to spend a given amount of
cryptocurrency and, each time a block has to be added to the chain, solve a complex
computational-mathematical problem. This problem was specifically designed to limit the
possibility for a malicious entity to manipulate the blockchain by falsifying transactions. The
probability of attacks is extremely low, since adding a new (malicious) block or modify a
previously added block to the chain would require control of the majority of the network
nodes
(to make them agree with the modification).
- Wallet: people transfer cryptocurrency using wallets. Cryptocurrency cannot be stored on a
physical memory; rather, it is the result of previous transactions. Hence, the wallet only stores
credentials (a complex, unchangeable combination of automatically assigned numbers and
letters), which enable blockchain users to transfer cryptocurrencies they own. Each wallet is
associated to one (or more) unique addresses. Should a user want to send a given amount of
cryptocurrency to a peer, he/she would have to specify the recipient’s address and the desired
amount, and use his/her credentials to validate the transaction. This aspect is particularly
important, since in case of credentials loss, the cryptocurrency owned by the user would not
“disappear”, but the user would be no more able to spend it. Moreover, the fact that the user
validates the transaction with his/her credentials certifies that he/she was the actual initiator
of the transaction.

RELEVANCE OF BLOCKCHAIN TECHNOLOGY

Blockchain technology can be integrated into multiple areas. The primary use of blockchains
today is as a distributed ledger for cryptocurrencies, most notably bitcoin. There are a few
operational products maturing from proof of concept by late 2016.

As of 2016, some observers remain skeptical. Steve Wilson, of Constellation Research,

believes the technology has been hyped with unrealistic claims. To mitigate risk, businesses
are reluctant to place blockchain at the core of the business structure.

Smart contracts

Blockchain-based smart contracts are proposed contracts that could be partially or fully
executed or enforced without human interaction. One of the main objectives of a smart
contract is automated escrow. An IMF staff discussion reported that smart contracts based on
blockchain technology might reduce moral hazards and optimize the use of contracts in
general. But "no viable smart contract systems have yet emerged." Due to the lack of
widespread use their legal status is unclear.

Banks
Major portions of the financial industry are implementing distributed ledgers for use
in banking and according to a September 2016 IBM study, this is occurring faster than
expected.

Banks are interested in this technology because it has potential to speed up back
office settlement systems.

Banks such as UBS are opening new research labs dedicated to blockchain technology in
order to explore how blockchain can be used in financial services to increase efficiency and
reduce costs.

Berenberg, a German bank, believes that blockchain is an "overhyped technology" that has
had a large number of "proofs of concept", but still has major challenges, and very few
success stories.

Other uses

Blockchain technology can be used to create a permanent, public, transparent ledger system
for compiling data on sales, tracking digital use and payments to content creators, such as
wireless users or musicians. In 2017, IBM partnered with ASCAP and PRS for Music to
adopt blockchain technology in music distribution. Imogen Heap's Mycelia service has also
been proposed as blockchain-based alternative "that gives artists more control over how their
songs and associated data circulate among fans and other musicians." Everledger is one of the
inaugural clients of IBM's blockchain-based tracking service.

New distribution methods are available for the insurance industry such as peer-to-peer
insurance, parametric insurance and microinsurance following the adoption of
blockchain. The sharing economy and IoT are also set to benefit from blockchains because
they involve many collaborating peers. Online voting is another application of the
blockchain.

Blockchains facilitate users could take ownership of game assets (digital assets), an example
of this is Cryptokitties.

Non-cryptocurrency designs include:

 Hyperledger – a cross-industry collaborative effort from the Linux Foundation to support

blockchain-based distributed ledgers, with projects under this initiative including
Hyperledger Burrow (by Monax) and Hyperledger Fabric (spearheaded by IBM)
 Quorum – a permissionable private blockchain by JPMorgan Chase with private storage,
used for contract applications
 Tezos, decentralized voting.
 Proof of Existence, an online service that verifies the existence of computer files as of a
specific time.

On May 8, 2018 Facebook confirmed that it is opening a new blockchain group.Which will
be headed by David Marcus who previously was in charge of Messenger. According to The
Verge Facebook is planning to launch its own cryptocurrency for facilitating payments on the
platform.

In September 2018, IBM and a start-up Hu-manity.co launched a blockchain-based app that
let patients sell anonymized data to pharmaceutical companies.

Benefits

Recent years, there have been many bank endeavours to improve environmental performance
and environmental management, launching sustainability market initiatives focused on
working together on key matters, such as the development of a joint climate change strategy.
In addition, many banks are experimenting with as well as implementing the blockchain
technology, believing in and betting on its ability to promote economic growth and lead to
faster development of green technologies. The most attention is focused on “the concept of
smart contracts” one of the most interesting aspects of blockchain. Smart contracts, encoded
in a programming language, are embedded in the blockchain and are executed with the
transactions.
In addition possibility of the blockchain innovative technology use by banks in modern
conditions acquires some special significance, as it gives an opportunity to limit (or to
eliminate) the use of financial intermediaries in effecting transactions.

It is estimated that blockchain based systems could bring a potential cost savings of 70% on
central finance reporting due to the more streamlined and optimized data quality,
transparency and internal controls, of 50% on business operations, such as trade support,
clearance and settlement, due to a more efficient and effective clearance and settlement
process, of 30–50% on compliance thanks to transparency and auditability of financial
transactions, and of 50% on centralized operations due to more robust digital identities and
mutualization of client data among participants.
CHALLENGES IN IMPLEMENTATION OF BLOCK CHAIN
TECHNOLOGY IN BANKS

Blockchain technology is being hailed as one of the most revolutionary and disruptive
technological advances of today. The technology that underlies the digital
currency bitcoin has changed our perception of what constitutes money as well as the
storage and transfer of value.

However, what makes the blockchain truly revolutionary is its potential for applications
beyond processing bitcoin transactions. Today, there are hundreds of startups that are using
blockchain technology to disrupt an array of industries such as trade finance, healthcare,
cloud storage and cybersecurity, among many more.

Despite the large number of industries that the blockchain is impacting, there are also
concerns regarding the technology that are still preventing its widespread adoption.

1. Initial Costs

Though the adoption of blockchain technology promises long-term benefits with regard to
productivity, efficiency, timeliness and reduced costs, it is expensive to initially put it in
place. The software required to run blockchain technology in organizations must typically
be developed for the specific firm and is therefore expensive to purchase, acquire or develop
in-house. Moreover, organizations may have to obtain specialized hardware for use with the
software.

In addition to the software costs, organizations must also find qualified personnel to work in
tandem with the technology. The blockchain technology space is relatively new and is
growing at such a fast rate that professionals proficient in the field are few and far between.
Due to the large demand and limited supply, organizations must be willing to pay large
salaries to the individuals who are qualified for these positions.

This means that a move to a complete or even partial blockchain-based system is out of
reach for most small- and medium-sized business due to the high setup costs involved.

2. Integration with Legacy Systems

In order to make the move to a blockchain-based system, an organization must either
completely overhaul their previous system or find a way to integrate their existing system
with the blockchain solution.

However, it may be difficult for blockchain solutions to handle all functions needed by
organizations, initially making it difficult to completely eradicate legacy systems.
Therefore, considerable changes must be made to the existing systems in order to facilitate a
smooth transition. This process may take a significant amount of time, funds and human
expertise.

In some cases, it may be undoable to reconcile the two systems, and the organizations must
acquire new systems that are compatible with the blockchain solution. Many organizations
are reluctant to make the move to blockchain solutions because of the meticulous planning,
time and money that would be required in order to achieve successful company-wide
implementation.

3. Energy Consumption
The Bitcoin network, as well as the Ethereum network, both use the proof-of-work
mechanism to validate transactions made on the blockchains. This mechanism requires the
computation of complex mathematical problems to verify and process transactions and to
secure the network. These calculations require large amounts of energy to power the
computers solving the problems. In addition to the energy used to run the computers, a
sizable amount of energy is also required to cool down the computers.
In a white paper published in June 2017, the World Economic Forum stated, “Estimates
liken the bitcoin network’s energy consumption to the power used by nearly 700 average
American homes at the low end of the spectrum and to the energy consumed by the island
of Cyprus at the high end. That’s more than 4.409 billion kilowatt-hours, a Godzilla-sized
carbon footprint, and it’s by design. It’s what secures the network and keeps nodes honest.”

The large amount of energy required to keep the most well-known blockchains in operation
is a deterrent to many corporations that are now focusing on sustainable methods of doing
business. With climate change being a major concern, such massive use of energy does not
seem justifiable.

It should be noted, however, that the Ethereum network is planning a move to a proof-of-
stake mechanism, which would require much less energy in order to function. Since most
real-world blockchain applications are based on Ethereum’s network, this would make the
move to blockchain technology more sensible with regard to energy consumption.

4. Public Perception

The majority of the public is still oblivious to the existence and potential uses of this
technology. In order for blockchain technology to make the move to the mainstream, there
must first be a public buy-in to its benefits. Though the technology is revolutionizing many
different industries, knowledge of the benefits of distributed ledger technology is still
limited to those who are involved in the technology space and those whose industries are
adopting blockchain solutions.

Presently, blockchain technology is nearly synonymous with Bitcoin. Though the value of
bitcoin continues to rise to unprecedented levels, there is still an association of the
cryptocurrency with the shadowy dealings of money laundering, black market trade and
other illegal activities.

Before mainstream adoption can be achieved, members of the public must understand the
difference between bitcoin, other cryptocurrencies and the blockchain. This will help
remove the sometimes-negative undertones of Bitcoin and allow the technology to stand on
its own, which will lead to an increase in willingness to utilize the technology.

5. Privacy and Security

Blockchains, as in the original design, are made to be publicly visible. Take, for instance,
the Bitcoin blockchain, which is designed to be accessible to all those who have made a
transaction on the network.

In the case of bitcoin and other cryptocurrencies, this is an important feature. However, for
governments and corporations, this creates a number of concerns. Governments and
corporations have a need to be able to protect and restrict access to their data for a myriad of
reasons. This means that blockchain technology cannot work in spaces with sensitive data
until this challenge is met.

However, a blockchain can be customized to meet the needs and specifications of the task at
hand. A blockchain can be made permissible. This means that people are only able to access
parts of the blockchain that are relevant to their tasks. Although creating such blockchains
takes a sizable amount of planning and expertise, it lessens the apprehension that firms and
governments have about the technology, thus making adoption more likely.

As the blockchain ecosystem evolves and different usecases emerge, organisations in all
industry sectors will face a complex and potentially controversial array of issues, as well as
new dependencies.

1. Awareness and understanding

The principal challenge associated with blockchain is a lack of awareness of the technology,
especially in sectors other than banking, and a widespread lack of understanding of how it
works. This is hampering investment and the exploration of ideas. As George Howard,
contributor to Forbes Media and Entertainment, says about the music business, “Artists –
visual, musical, or otherwise – really must educate themselves about these emerging
technologies, or suffer the fate of being exploited by those who do”.32 This is a message that
applies to organisations, also.

2. Organisation

The blockchain creates most value for organisations when they work together on areas of
shared pain or shared opportunity – especially problems particular to each industry sector.
The problem with many current approaches, though, is that they remain stove-piped:
organisations are developing their own blockchains and applications to run on top of them. In
any one industry sector, many different chains are therefore being developed by many
different organisations to many different standards. This defeats the purpose of distributed
ledgers, fails to harness network effects and can be less efficient than current approaches.

SWOT ANALYSIS OF THE ADOPTION OF BLOCKCHAIN.

Internal Strengths
- Fast and low-cost money transfers
- No need for intermediaries
- Automation (by means of smart contracts)
- Accessible worldwide
- Transparency
- Platform for data analytics
- No data loss/modification/falsification
- Non-repudiation
Weaknesses
- Scalability
- Low performance
- Energy consumption
- Reduced users’ privacy
- Autonomous code is “candy for hackers”
- Need to rely to external oracles
- No intermediary to contact in case of loss of users’ credentials
- Volatility of cryptocurrencies
- Still in an early stage (no “winning” blockchain, need of programming skills to read code,
blockchain concepts difficult to be mastered)
- Same results achieved with well-mastered technologies
External Opportunities
- Competitive advantage (if efforts to reduce/hide the complexity behind blockchain are
successful, or in case of diffusion of IoT)
- Possibility to address new markets (e.g., supporting car and house sharing, disk storage
rental, etc.)
- Availability of a huge amount of heterogeneous data, pushed in the blockchain by different
actors
Threats
- Could be perceived as unsecure/unreliable
- Low adoption from external actors means lack of information
- Governments could consider blockchain and smart contracts “dangerous”
- Medium-long term investment
- Not suitable for all existing processes
- Customers would still consider personal interaction important

CONCLUSION
Blockchain technology has the potential to provide innovation in the key areas of banking
business. Manual processes that make up most accounting standards are automated by the
implementation of blockchain technology, massively impacting the accounting industry.
For instance, current financial accounting calls for a double entry system that is meticulously
audited for within the public trust. While this system ensures accuracy and verifiability, it
comes with a great labor and time cost, and under current methods nearly impossible to
automate.
As the number of economic agents applying the blockchain technologygrows, it will reduce
costs of financial interaction of companies and commercial banks, as well as operational risks
by ensuring the contracts information transparency. This thesis investigated the possibilities
of using Blockchain technology as an enabler for process change in KYC and banking
processes in banks. The KYC process in DNB was evaluated on a non-technical basis. The
information gathered from DNB showed positive attitudes towards such a concept, and it
became clear that there is a strong desire and great need of decentralization of KYC
processes. The presence of a technical evaluation would obviously have yielded useful and
insightful results, unfortunately, due to time-constraints and corporate delays, this was
unfortunately not achievable. Going back to the original research topic of this thesis, the
results of the non-technical evaluation highly indicate that Blockchain can be a powerful tool
for process innovation in KYC processes, that can revolutionize the entire system in banks.
As long as the banks invests in enough resources (people, time, and technology), it is most
definitely successfully achievable.

REFERENCE

1) “BITCOIN” Magazine January 3 2018 Retrieved from

https://www.nasdaq.com/article/five-challenges-blockchain- technology-must-
overcome-before-mainstream-adoption-cm899472

2) “FINANCIAL INNOVATION”, December Retrieved from

https://link.springer.com/article/10.1186/s40854-016-0034-9
3) “Block chain Challenges and Opportunities: A Survey” Retrieved from
https://www.henrylab.net/wp-content/uploads/2017/10/blockchain.pdf

4) “A Survey of Block chain Security Issues and Challenges” Retrieved from

https://pdfs.semanticscholar.org/f61e/db500c023c4c4ef665bd7ed2423170773340.pdf